Air Serbia was established in 1927 under the name Aeroput, when the company began its operations in the Kingdom of Yugoslavia. After the WW II, in 1948, the company was nationalized and renamed to JAT (Jugoslovenski Aerotransport), thus operating as a flag carrier for the SFR Yugoslavia. Although being a communist country, Yugoslavia broke ties with Soviet Union in 1948, which opened the door for JAT to procure modern wester airplanes. In 1988, JAT was ranked as 10th airline in Europe by size, hence, JAT flew to 76 destinations. Successful period for JAT lasted till 1990, when the company entered crises period caused by external factor – the dissolution of Yugoslavia, this left the company stagnating during the sanctions period. The fleet was aging and there was a lack of investments. Since then, the government, owner of the company, searched for a strategic partner.
New era began in 2013, when Jat Airways and Etihad Airways signed Strategic Partnership Agreement, whereas Etihad acquired 49% of the company (51% Government of Serbia) and management rights for five year period. Jat Airways was reorganized and renamed to Air Serbia as of October 2013. The „new” company was „cleaned” from the old debts, since the government assumed all liabilities till end of 2013. The main hub continued to be Nikola Tesla Airport in Belgrade. The company re-started as a full service airline (FSA), offering all services typical for FSA: hub and spoke system, mixed fleet, short/medium haul, flights different classes of services, etc. One of the first significant changes in the company was implementation of the SabreSonic check-in system in 2014, which further reduced costs of operation and improved efficiency. From 2014 to 2016, Air Serbia offered high quality service. In January 2015, Air Serbia received the highest combined airline ratings by the internationally-regarded website AirlineRatings.com. In May 2014 Air Serbia also started a charter company called Aviolet, and equipped it with four Boeing 737-300 fleet.
In the period from 2014 till 2017, Air Serbia recorded profits in financial statements. Respectively, in 2014 it was $ 3.2mn, in 2015 was $ 4.3mn, in 2016 $0.9mn, while in 2017 it was $ 19.2mn. Hence, everything looked fine from the outside. But, if we go “deeper” in analyzing financial statements, we will notice significant state subsidies. Namely, in the same period they amounted: in 2014 $ 84mn, in 2015 $ 53mn, in 2016 $ 42mn and in 2017 $ 24mn. De facto, if there were no state subsidies, the financial “picture” of the company would look significantly different. Thus, since Serbia is not an EU member state (it’s a candidate), the government was able to “support” the local flag carrier. Air Serbia also enjoyed special status at Belgrade Airport (also owned by government).Thus, year by year, the competition from low cost airlines (LCA) was increasing as they (WizzAir, EasyJet) introduced new routes competing Air Serbia at Belgrade Nikola Tesla Airport. Additionally, in 2015, low cost airlines started using Nis airport (city south of Serbia), which was not active previously, thus putting additional pressure on Air Serbia. In 2016, out of 42 destinations, the company was facing no competition on 26 routes, thus, just a year later in 2017, this number reduced to 21. As a response to a new challenging environment, the company decided to implement new “hybrid” business model, which is combination of low cost and full service airline. The strategy was recommended by Etihad top management. Thus, the same “hybrid” model was applied in two other European companies owned by Etihad, Alitalia and Air Berlin, both defaulted in 2017 (Etihad withdrew). Due to its uncesefull business strategy in Europe, Etihad longtime general manager James Hogan was dismissed in July, 2017. In January 2018, Air Serbia announced new pricing mechanism (active from March 2018). Four new tariffs were introduced – Economy White, Economy Blue, Economy Red or Business Silver. The tariffs were differentiated by baggage allowances, flexibility and other additional services. The company further reduced costs by layoffs in services segment, also new slimmer seats were implemented (increasing the capacity of its fleet by 12% in the total number of seats). The routes to Germany were reduced, since the company could not provide onward connections with its ex major codeshare Air Berlin. The “hybrid” model used by Air Serbia received negative attention from wide public in Serbia. Clients complained that the online booking system was complicated and confusing, hence, they felt like being cheated.
If we further analyze Air Serbia rating on airlinequality.com, we will see that the company rating significantly dropped in 2018. It was not clear whether Air Serbia is a low cost or full service airline, as the service resemble to low cost (thus less efficient), while the ticket were priced above low cost competitors. Load Factor of Air Serbia in 2016 was 72.4%, while in 2017 increased to 73.4%. For comparison purpose, low cost airlines such us Wizz Air and easyJet had load factors above 90% in 2017. Let’s further investigate Air Serbia’s political and economic environment. Due to the fact that Serbia is not an EU member, the penetration of low cost companies is lower, sin
ce the market is not as opened and competitive like the EU – no state subsidies. Hence, this will slowly change, as Serbia grab its momentum in joining the EU family though integration process. Also, the Government of Serbia, owner of the Nikola Tesla airport, granted a 25-year concession of the airport (Air Serbia main hub), active from September 2018, which means that equal treatment will be granted to all third parties. In 2017, as per Belgrade airport statistics, biggest competitor of Air Serbia was Wizz Air with 12.7 % of flights share at Belgrade Airport (Air Serbia was 50.3%).
Problems
The “bad” financial results is a consequence of not properly defined strategy, thus, subsequently followed with fickle execution. According to Tomova and Ramajova (2013), the following airline business models can be identified: (i) pure low-cost airline model; (ii) hybrid airline with dominating low-cost elements; (iii) hybrid airline with dominating FSC business model elements; (iv) traditional full service airline business concept. At the moment, Air Serbia is between (ii) and (iii) model, thus missing the key elements from both. As per Chopra and Lisiak (2007) an airline should choose to be either a cost-driven or revenue-driven airline, thus it is very hard to succeed in both. Air Serbia has mixed fleet of 21 airplanes (1 long haul, 14 short-medium and 6 short haul). The planes originate from different producers as well, 6 ATR, 11 Airbus and 4 Boeing (used for charter flights by Aviolet in peaks). This kind of fleet structure is costly to maintain. Air Serbia had 73.4% load factor in 2017, implicating significantly lower utilization of capacities from its main competitors, for example, Wizz Air had 91%. In 2016, Air Serbia renewed its flight to New York (after 24 years). In order to do so, company rented Air Bus A330 (long haul airplane) from Air India. The flight to NY was scheduled five times a week, thus reduced to four (lower demand). This caused prolonged stops of airplane at airports (higher costs). Air Serbia also started negotiations with Canada, as a preparation for introduction of one more long haul flight, Belgrade – Toronto. The pricing of Air Serbia is differentiated in two groups: (i) economy and (ii) business. Economy fares can have up to four sub-groups differentiated by services included. This is rather complicated pricing system. Also, Air Serbia allowed free carry-on baggage dimension and weight are lower than those at Wizz Air (8kg VS 10kg).
On the other hand, Air Serbia have several mitigating circumstances than are beneficial. First of all, it’s owned by Serbian Government (51%) which will continue to subsidies the company as long as it’s possible, giving the needed “space” for strategic adjustment. This also means higher entry barriers for newcomers. Air Serbia has a long list of codeshare partners (codeshare partner is when two or more airlines share the same flight), which gives them advantage of connecting flights. Average salary is lower in Serbia than in bordering EU member states, meaning lower salary expanse for the company. Importantly, Air Serbia (a successor of JAT) has been in the business for more than 90 years, it is recognized as a safe airline with long tradition and insights in the market.
Solution
Air Serbia should precisely define and communicate its strategy. In the current environment where “flood of low cost carriers” is about to enter Serbian market, the company should implement model of the hybrid airline with dominating low-cost elements.
First of all, the company needs to optimize its fleet. By having a homogeneous medium sized fleet, the company can further reduce costs of maintenance. For example, the company should only use short to medium haul Airbus models (currently 10 of them are used by Air Serbia) as they are the youngest and have the lowest fuel consumption.
As a next step, the company should change its pricing strategy. The pricing model should be simplified, with less sub groups. Also, company should introduce a time of booking as a source of fare differentiation. This will allow company to better predict its load factor, as it can offer cheaper price on less “popular” flight prior to departure, thus increasing the capacity utilization. Important to notice, almost half of Serbs live outside of Serbia, hence, significant diaspora is located in Western Europe. Air Serbia should focus on less congested regional airports (point to point flights) in the countries where majority of Serbian diaspora is located, such as Germany, Austria, Switzerland and Sweden. Air Serbia should focus only on short haul flights. The reason for this is that Belgrade Airport (Air Serbia main base) is relatively small by number of passengers, its ranked 84th by passenger number in Europe. Hence, it is questionable if there is enough passenger potential to utilize long haul flights. In this respect, larger airports have much more potential, as they are also regional hubs (higher number of passengers per year). Although there is not enough data to firmly state, but we can only assume that the flight Belgrade – New York, for which company had to rent long haul airplane, is not profitable. It is crucially important, that clearly defined strategy is followed by eminence execution. By selecting a strategy of a cost driven hybrid airline with dominating low-cost elements, the company should communicate it openly to all the stakeholders, emphasizing the cost cutting culture (especially to employees) – similar to the one managed by Singapore Airlines. Organizational structure should be optimize for more point to point flights, meaning that less ground crew will be needed since there won’t be much connecting flights (and spikes to handle).
The company should hire experienced leadership team coming from similar companies that successfully transformed national flag airlines. Further on, Air Serbia should continue its existing codeshare partnership agreements, thus enter new ones if the benefit is recognized.
